Letter From Greece

When we think of Greece we think of history and holidays. You know, Aristotle, Plato and Socrates and, of course, Alexander the Great. But that was millennia ago. These days, there’s the magnificence of the Acropolis towering over Athens, the beauty of Corfu with its sparkling sea, charming villages and tempting restaurants and the almost constant sunshine.

But for Greeks, their own beautiful country has fallen on very hard times.

In the Australian, British and American media it’s the Greeks who have brought all this on themselves. They signed up to joining the euro and in doing so accepted that their government debt should never exceed 60 percent of GDP and the budget deficit should stay below three percent of GDP.

Well, they’ve come nowhere near it. Their government debt is a massive 160 percent of GDP – nearly three times the allowable limit. And the budget deficit is over 10 percent of GDP, more than three times the allowable limit.

It’s a terrible story of public policy failure. All this debt has to be funded just as your own household debt has to be funded. Without help, it can’t be. The government would be unable to service its loans. So to avoid default the Greeks have asked the rest of the eurozone for help. And this is my point. They’ve said they will but at a very steep price. That price will extract a very high human toll. Greece has to implement an austerity package more drastic and socially savage than anything we’ve experienced since the Great Depression.

Think about it: before the latest package, Greece had already agreed to increase taxes by around $8 billion by 2013. That means increasing the GST, reducing the tax-free threshold, the introduction of taxes on luxuries and the payment by everyone of a ‘solidarity bonus’ of between one and two percent.

That isn’t all. Thirty thousand public servants are to be retrenched, pensions reduced by up to 20 percent and public sector pay severely cut.

Now imagine doing all that here in Australia! Imagine the reaction of the unions. Imagine the reaction of voters! The public would be outraged.

And this was before the latest, additional austerity measures were foisted on the Greeks. With the latest package, they have to cut government spending by a further 1.5 percent of GDP. If we had to do that, it would mean spending cuts of around $150 billion. This time there are to be further cuts in public sector jobs and public sector wages. And the minimum wage has to be cut by over 20 percent.

I’m not sure why but our media don’t focus on this pain. Riots may not be responsible or even excusable but I think you’d agree, with austerity packages of these dimensions they are explicable. By the way, all this pain will allow Greece to access €130 billion of extra loans so that it won’t have to default on its borrowings. That means Greece can stay in the euro.

Some Greeks – and others – think they might be a better off just defaulting on their loans. Well, it’s hard to believe this will make matters better. For a start, Greece would leave the eurozone and re-introduce the Drachma. At a guess is would depreciate by about 50 percent. So the savings and assets of Greeks would be halved in value. They couldn’t get loans. No one would want to lend to them. So the cuts which they have to make under the austerity packages would have to be made anyway.

And then there’s the contagion effect. Europe’s banks hold a whole lot of Greek debt. For a start, French banks hold €15 billion of Greek government debt. German banks hold about €22 billion. Add to that the fact those same banks hold a good deal of Greek private sector debt and the problem becomes more worrying. All up, French banks hold over €50 billion of Greek debt and German banks around €35 billion.

A collapse of Greece would mean all that money is lost. So French and German banks would have to be bailed out by their governments. And that’s just the French and Germans. Spare a thought for little Cyprus, which would need plenty of outside help.

So sure, Greece is a lovely place and the people are warm and friendly. But you need to understand why they are so agitated. And who’s to blame? Well, that’s a tough one. For a start, successive Greek governments cooked the books. Secondly, the banks were more than happy to keep lending money thinking that because Greece was in the euro nothing could go wrong. Thirdly, the politicians just kept spending unconcerned about the consequences. Finally, the voters elected those politicians.

So they can work out for themselves who is to blame. But spare a thought for the average Greek ‘working family’. They are seeing their living standards devastated. For those of us who like Greece and like the Greeks, it’s a very sad situation.